Enforcing Cooperation in Networked Societies
We endogenize social network formation and collective enforcement using a model in which players interact bilaterally and repeatedly along costly links. Cooperation is supported by the threat of collective punishments that spread through the network. Optimal networks are attainable in equilibrium. When the society is homogeneous, the optimal network consists of many separate cliques. Introducing heterogeneous match quality gives rise to more realistic ”small worlds” networks, with connectedness, small distances, and high clustering.
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